The Debt and the Lien: Two Completely Different Problems

A debt is a lawful obligation, usually to pay money to someone. Secured Debts are those where the borrower has granted the lender a lien or security interest in some item of real or personal property to ensure that the lender is actually paid.

Two simple and common examples are home loans – where the borrower secures the loan with his house; and car loans – where the loan is secured by the car. In both cases, if the loan isn’t paid when due, the lender can recover the security: the house or the car to pay off the loan.

As a bankruptcy attorney, I explain this all the time to my clients. It’s not an easy concept to grasp, and I am often asked “But why if I don’t have to make payments, can they still take my car?”

In Bankruptcy, a discharge will terminate the obligation to pay the debt. But it doesn’t remove the lien! So, although the borrower may no longer have the responsibility to pay the debt, if he wants to keep the security he will have to pay. Thus, a car loan is discharged in most bankruptcies and the borrower no longer has to pay the car company or bank. But the lien remains, so the lender can still pick up the car for non-payment.

The same is true for a home loan. The bankruptcy actually discharges the debt, but the house remains with the lien or mortgage attached. So, the owner can’t sell the house without paying off the bank.

The only real effect the bankruptcy has in either scenario is that the car company or the mortgage bank can’t get any more from the debtor after the bankruptcy than the security. Thus, default on the car payment, the car company gets the car. Don’t pay the mortgage and the bank can foreclose on the house.

Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.

This site does not create an attorney-client relationship and does not constitute legal advice. Each person's situation is different, you are encouraged to consult a licensed attorney in your state if you have questions about your situation.